Microsoft

Microsoft’s capital allocation has been very shareholder-friendly and strategic. First and foremost, the company reinvests heavily in its business at high returns – it consistently spends substantial amounts on R&D ($29.5 billion in 2024, about 12% of revenue) to maintain technology leadership in areas like cloud and AI.

It is also investing significantly in capital expenditures (data centers, servers, etc.) to widen its moat in cloud computing; FY2024 saw $44 billion in capex and management has indicated this will continue to support future growth.

We generally favor asset-light models, but in Microsoft’s case the big capex is growth-oriented – building an efficient scale in Azure and AI infrastructure that few competitors can match. Beyond organic investment, Microsoft has a track record of acquisitions that create value.

Under CEO Nadella, the company has made bold buys like LinkedIn, GitHub, Nuance, and most recently Activision Blizzard, focusing on assets that bolster its ecosystem (professional network, developer tools, AI and speech tech, gaming content) rather than diversifying away from core strengths.

These deals were expensive, but Microsoft’s integration and long-term development of these platforms have been solid so far (e.g., LinkedIn’s revenue has grown strongly post-acquisition). Importantly, Microsoft can afford these acquisitions without compromising its financial stability. The company also returns capital to shareholders consistently.

It pays a steady and growing dividend (currently yielding around 0.8-1.0%), and while the dividend is modest, it’s very safe and has room to increase. Microsoft prioritizes share repurchases as well – in FY2024 it spent tens of billions on buybacks (though temporarily slightly less than prior year due to the big acquisition).

These repurchases have slowly reduced the share count (from 7.50 billion in 2022 to ~7.43 billion in 2024)), offsetting dilution from employee stock compensation. Management tends to buy back stock consistently, and can accelerate repurchases opportunistically when the stock is undervalued.

We see relatively minimal dilution (stock-based compensation is sizable in dollars but modest as a percentage of market cap, and it’s being neutralized by buybacks). Microsoft’s capital allocation strikes a good balance: fueling future growth, making strategic acquisitions (with generally positive results), and returning surplus cash to owners.

We also appreciate that management has not over-leveraged the company to fund buybacks or dividends – all payouts are well covered by free cash flow.

Overall, Microsoft’s capital deployment has been exemplary, contributing to a high return on equity and invested capital over time. (Morningstar even specifically praises the management for “outstanding” capital allocation.) The only slight knock is that some acquisitions (e.g. the Nokia phone fiasco pre-Nadella, or paying top-dollar for certain assets) were imperfect, but under current leadership the record is strong.